We're Watching These Trends At Rocky Mountain Liquor (CVE:RUM)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Rocky Mountain Liquor (CVE:RUM) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Rocky Mountain Liquor is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = CA$2.5m ÷ (CA$26m - CA$8.2m) (Based on the trailing twelve months to September 2020).

Therefore, Rocky Mountain Liquor has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 12% generated by the Consumer Retailing industry.

See our latest analysis for Rocky Mountain Liquor

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Rocky Mountain Liquor's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Rocky Mountain Liquor, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 14% from 18% five years ago. However it looks like Rocky Mountain Liquor might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Rocky Mountain Liquor has done well to pay down its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Rocky Mountain Liquor's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Rocky Mountain Liquor has the makings of a multi-bagger.

If you want to know some of the risks facing Rocky Mountain Liquor we've found 4 warning signs (2 are concerning!) that you should be aware of before investing here.

While Rocky Mountain Liquor isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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